Month: January 2017

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For the last few quarters, I’ve posted returns by asset class (by representative ETF), as well as year-to-date, last twelve months, and last five years. While there is still no predictive power in this data, I updated those charts (minus the year-to-date since it is the same as the last twelve months in this case) as of the end of Q4 2016 for those of you that are interested (see below).

· While you’ve undoubtedly heard about the rally in stocks since the election, it’s easy to forget how poorly the quarter started in October, and easy to overlook that the rally didn’t extend to foreign stocks, in US-dollar terms, at all. Emerging markets suffered (threats of trade wars, tariffs, etc. don’t bode well for emerging markets that are big on manufacturing and cheap labor), and bonds suffered as well (forecasts for a stronger US economy, infrastructure spending, and tax cuts likely mean higher rates and higher inflation, which is bad for fixed income). Our clients’ portfolios have their stock allocation more heavily weighted toward US stocks, but the underperformance of foreign investments offset some of the growth in US stocks in Q4. Our clients’ portfolios have the bond allocation skewed toward short-maturities, which don’t react as poorly to increasing interest rates, and which reflect those higher rates in the future much more quickly than a portfolio of long-dated bonds would. Overall, the quarter had mixed results, but could have been far worse if we were more weighted toward foreign stocks and/or long-dated bonds.

· All major asset classes were positive for 2016 as a whole. That is a pretty big accomplishment considering where we were in mid-Feb (see 2016 chart). The best performers were US Small Cap stocks (we tilt portfolios toward Small Caps) which were up more than 18% on the year.

· On the five-year chart, you can clearly see the marked underperformance of foreign stocks (developed and emerging markets), emerging market bonds, and most notably, commodities (everyone remembers the massive declines in energy prices back in 2015). While commodities have bounced back after bottoming in early 2016, they have a long way to go to regain their highs, and that is a very good thing for worldwide consumers (though not so good for oil-producing / oil-exporting countries). The underperformance of international markets can be viewed in one of three ways: 1) international stocks are now dirt cheap as compared to US stocks, OR 2) international economies are doing much more poorly than the US economy and therefore, due to limited future growth, their stock markets have fairly performed much more poorly than US stocks OR 3) some combination of the two. There is no way to know the answer, so we will remain diversified and will continue to include foreign stocks at a ratio of about 1:2 vs. US stocks in most portfolios. I’m confident the tide will turn eventually and foreign markets will outperform their US counterparts. We just can’t know when it will happen and so instead of trying to pick winners or losers, we believe it makes more sense to invest globally and be confident that population growth + productivity growth + inflation will result in nominal growth on average across all geographies and that in turn will result in long-term growth for a globally diversified portfolio of stocks.

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The PWA (Perpetual Wealth Advisors) Financial Tastings Blog is intended to provide our clients and other interested readers with bite-sized, easily digestible information on personal finance topics. We used to publish a quarterly newsletter with similar information and will be archiving some of those topics here. Instead of continuing with a publication that was akin to a seven-course meal every three months, we have found that the fast-paced, mobile-driven world required smaller amounts of information, communicated more frequently. We've turned to the blogging concept to provide it. Topics will include both original content and links to other articles of interest. They will span key areas of personal finance including planning, goal setting, budgeting, cash flow management, debt management, risk management, employee benefits, tax, investments, retirement planning, and estate planning. We'll try to keep posts brief, simplify where possible, and answer as many questions as we can. Speaking of questions, feel free to send them to blog@perpetualwealthadvisors.com. We'll occasionally open up the mailbag for a Q&A post. Bon appetit!

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